February 15, 2021 – The Debtors' Official Committee of Unsecured Creditors (the “Committee”) objected to the Debtors' chosen stalking horse (Digiatech, LLC or "Digiatech') and proposed sale procedures arguing that the Debtors, in concert with their insider stalking horse, are foisting "an extremely expedited timeline that cannot possibly lead to a reasonable sale process and higher or better offers" on the Debtors' unsecured creditors; effectuating a result "only designed to guarantee that Digiatech will be the Successful Bidder" before converting the cases to Chapter 7 [Docket No. 162].
Pointing to recently received funds ($6.0mn from a litigation matter) not otherwise included in the budget and in respect of which Digiatech has no security interest, the Committee urges the Court to extend the "timeline by a few short weeks. A modest extension will balance the Debtors’ and Digiatech’s concerns about cost while this case is pending, with the interests of achieving a competitive bidding process and realizing maximum value (or any value at all) for the benefit of creditors."
A hearing to consider sale-related issues, previously scheduled for February 11th, is now scheduled for February 18th.
The Committee’s objection reads: “[T]he Debtors are proposing a sale of substantially all of their assets to Digiatech, LLC (‘Digiatech’), the newly minted Prepetition Lender, the DIP Lender, an affiliate of an equity holder, an affiliate of a pre-petition investment banker, an affiliate of a prepetition real estate consultant, and now the proposed Stalking Horse, via a $70 million credit bid on an extremely expedited timeline that cannot possibly lead to a reasonable sale process and higher or better offers. To add insult to injury, the Debtors and Digiatech, upon completion of this ‘game plan’ will seek to immediately convert this case to chapter 7. The Debtors’ Chief Financial Officer, in his First Day Declaration, states that ‘an open and competitive marketing process in the context of these chapter 11 cases represents the best strategy to maximize the value of the Debtors’ business for stakeholders and to capitalize on anticipated post-pandemic opportunities including if companies bring their employees back to the office and seek more flexible and efficient office arrangements, with a greater focus on safety and sanitation.’… The Committee agrees. The Committee supports a fair and competitive auction process intended to encourage all prospective bidders to put their best bid forward, protect jobs, and maximize value for all constituents. Simply put, this is not that process.
The sale process proposed by the Debtors is riddled with serious defects that, if not corrected, will chill bidding and prevent the Debtors from any opportunity to realize the maximum value for their business and assets, and thereby fulfilling their fiduciary duties to all creditors of these estates. The abbreviated sale process proposed by the Debtors is only designed to guarantee that Digiatech will be the Successful Bidder. If Digiatech intends to use the Chapter 11 process and all of its benefits to simply foreclose on its collateral, it must fund a process that is fair and equitable to all parties in interest. This Court should not reward Digiatech’s loan-to-own gambit, where it or its affiliates wore and continue to wear multiple hats with respect to these Debtors, designed to control the Debtors and benefit itself alone.
In light of Digiatech’s insider status and the strict scrutiny with which this Court must review the proposed transaction, the Debtors have not provided sufficient reason why the sale process must continue on a truncated timeline, without providing appropriate time for adequate marketing efforts and due diligence for interested buyers, aside from the unsurprising fact that Digiatech required such a timeline, and citing to the costs associated with remaining in Chapter 11. With the intention of converting the case to Chapter 7 immediately after the sale, and with no value enuring to the benefit of unsecured creditors and potentially leaving the estates administratively insolvent, the Debtors fail to provide a sufficient reason not to extend the timeline by a few short weeks. A modest extension will balance the Debtors’ and Digiatech’s concerns about cost while this case is pending, with the interests of achieving a competitive bidding process and realizing maximum value (or any value at all) for the benefit of creditors. The Committee understands that the Debtors have additional cash for the extra runway to extend the sale process. Just prior to the Petition Date, the Debtors settled a large litigation matter resulting in the Debtors receipt of approximately $6 million, which funds were not included or factored into the DIP budget. It would appear that Digiatech has no prepetition lien or security interest in these funds and Digiatech is attempting to perfect a security interest in these funds via the DIP Financing Motion. Nonetheless, these funds will pay for several weeks of the Debtors’ operating expenses. In addition, time is needed for the Committee’s financial professionals to review the Debtors’ budget and operations to determine if there are additional cash and/or cost savings available to fund continued operations to extend the sale process. Last, because Digiatech dictated how these Chapter 11 Cases were set in motion and when they were filed, it may simply need to provide additional cash to fund a proper sale process.”
The objection continues, “The Stalking Horse Bid fails to provide sufficient funds to ensure the administrative solvency of these cases. In fact, the Debtors effectively admit administrative insolvency by requiring Digiatech to provide $100,000 in cash for the purpose of converting the case to chapter 7 after the Sale. While the Stalking Horse Agreement requires Digiatech to assume certain post-petition liabilities, it is presumably limited by the DIP budget and would only cover those assumed liabilities incurred up to the closing date. Digiatech could have foreclosed on its collateral under state law, but it chose not to. By electing to bring this matter before the Bankruptcy Court, the Debtors and Digiatech must run a fair, open process, which the requested Bid Procedures do not create. What Digiatech seeks is the equivalent of a state law foreclosure action, but with the benefits of a section 363 free and clear order…The request to approve Digiatech’s right to credit bid is particularly inappropriate in these Chapter 11 Cases. The Committee was only recently formed on February 8, 2021 and the Committee has not had adequate time to investigate the extent, validity, priority, and perfection of Digiatech’s alleged liens which were acquired under circumstances that cry out for investigation. The Committee’s challenge and lien review period will not expire until almost a month after the contemplated Auction and Sale Hearing under the Interim DIP Financing Order. Moreover, any action challenging Digiatech’s liens (or asserting other causes of action) brought by the Committee will most likely not be resolved until after any closing of a Sale under the proposed sale timeline.”
Beginning at the end of December 2020, the Stalking Horse Bidder, an existing preferred stockholder and a subsidiary of Newmark Group, Inc. (Nasdaq: NMRK) ("Newmark"), purchased the Debtors' first lien and second lien secured debt (purchase price unknown); negotiated a financing package to both provide immediate emergency interim financing and $20.4mn of new money debtor-in-possession ("DIP") financing; and committed to taking on the stalking horse role.
In addition to an agreed purchase price that includes a credit bid capped at $70.0mn (effectively the entirety of the recently acquired prepetition debt, although the credit bid can be comprised of a mix of prepetition and DIP debt) and the assumption of certain liabilities; terms of Newmark's stalking horse bid include a 3% break-up fee and a $500k expense reimbursement.
The Debtors expect an expedited sale (bids by February 28th and a proposed closing date of March 8th) that will be followed by liquidation of the estates, through conversions to chapter 7 or structured dismissal.
The Debtors' motion reads: “The $70 million going-concern bid submitted by the stalking horse bidder will serve the critical function of setting a ‘floor’ for further competitive bidding. As noted above and set forth in the stalking horse agreement, the Debtors have agreed to a deal in principle with stalking horse bidder. The transaction in subject to definitive documentation, including the Stalking Horse Agreement….The anticipated 30-day timeline for the bidding process ensures that the assets will be comprehensively marked without unduly delaying the process of these cases. The process contemplated by the bidding procedures will leave no doubt that, at conclusion of that process, the Debtors will have explored all available alternatives and identified the highest or otherwise best offer for their assets.
The Debtors believe that approval of the Stalking horse agreement and related bid protections, as well as bidding procedures, will set these cases on positive trajectory and are essential to the Debtors’ ability to identify and consummate the sale or restructuring transaction offering the greatest value to their creditors.”
Key Terms of the Stalking Horse APA
- Seller: Knotel, Inc. and each of its subsidiaries (which includes all of the Debtors)
- Buyer: Digiatech, LLC or its designee.
- Purchase Price: The aggregate consideration for all or substantially all of the Debtors’ assets will be $70.0mn, which amount shall be in the form of a credit bid whereby the buyer shall:
- Credit from outstanding indebtedness under the DIP facility at the closing an amount up to the lesser of (x) $70.0mn or (y) the amount outstanding under the DIP facility at the closing, including any amounts outstanding under the prepetition credit agreement that are combined, consolidated, or rolled-up into the DIP facility;
- Credit from outstanding indebtedness under the prepetition first lien credit agreement an amount up to the lesser of (x) the result of (A) $70mn minus, (B) the amount credit bid pursuant to clause (i) above or (y) the amount outstanding under the prepetition first lien credit agreement, if any, pursuant to credit bid by buyer in its capacity as secured lender under the prepetition first lien credit agreement; and
- Credit from outstanding indebtedness under the prepetition second lien credit agreement an amount up to the lesser of (x) the result of ($70mn)minus, (B) the amount credit bid pursuant to clause (i) above, minus (C) the amount credit bid pursuant to clause (ii) above or (y) the amount outstanding under the prepetition second lien credit agreement, if any, pursuant to a credit bid by buyer in its capacity as secured lender under the prepetition second lien credit agreement;
- a portion of the amount outstanding under the prepetition credit agreement that is rolled-up into the DIP facility on or prior to the closing shall remain a claim in the Chapter 11 cases, in accordance with the DIP order; and
- any portion of amounts outstanding of the DIP facility and prepetition credit agreement that is not credit bid as part of the purchase price shall remain a claim in the chapter 11 cases, in accordance with the DIP order and/or any order issued by the bankruptcy court, and in addition shall assume from seller and become obligated to pay, perform and discharge, when due, the assumed liabilities.
- Bidder Protections: The Stalking Horse APA provides for break-up fee of $2.1mn (i.e., 3% of $70.0mn) and an expense reimbursement not to exceed $500,000.
Proposed Key Dates:
- Sale objection Deadline: February 22, 2021
- Bid Deadline: February 28, 2021
- Auction: Match 2, 2021
- Auction objection Deadline: Match 3, 2021
- Sale Hearing: March 4, 2021
In a press release announcing their Chapter 11 filing, the Debtors advised that: “As part of its strategic path forward, Knotel has reached an agreement to sell the business to an affiliate of Newmark Group, Inc. (Nasdaq: NMRK) ("Newmark"), a leading full-service commercial real estate firm. The Company has also made the decision to exit multiple locations in the U.S. as part of the process.
The Company has also made the decision to exit multiple locations in the U.S. as part of the process. The filing does not include Knotel's international operations".
Amol Sarva, the Debtors’ CEO commented further: "After a thorough review of strategic alternatives, we have determined that a process to sell our business and reshape our U.S. footprint is the best path forward to maximize value for our stakeholders. The pandemic created a uniquely challenging operating environment, with significant impacts on leasing velocity and the rate of renewals in key markets, particularly New York and San Francisco. We must address this now to position our business for sustainable growth and a successful future.
Our restructuring will enable us to strengthen our balance sheet, focus on a rightsized portfolio of locations, and maintain relationships with our customer base while continuing to build on Knotel's differentiated service offering. We continue to believe in Knotel's potential in the growing flex market."
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